I’ve posted Entry #159 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Same P/E10 Level Can Mean Different Things in Different Circumstances.
Juicy Excerpt: In the late 1980s and early 1990s, we were on our way from a P/E10 of 8 to a P/E10 of 44. We certainly had no way of knowing at the time that we would end up at 44. We had never gone that high before. But we knew that the P/E10 level was likely to continue going up after hitting 18 even if for a few months it went below that market. Never once in U.S. history has the P/E level peaked at 18. It usually peaks at 25 or 26. So the odds were strong at the time that the long-term direction of prices was downward.
Just the opposite was the case when we hit 18 in early 2009. The P/E10 value peaked at 44 in 2000 and started its way downward. Never in U.S. history have valuation levels began working their way up again on a long-term basis without first hitting 7 or 8. So the 18 that we saw in 2009 was an 18 on the way to becoming a 7 rather than an 18 on the way to becoming a 25. That makes all the difference in the world.